January 27, 2010 / 4:32 PM / 10 years ago

UPDATE 3-CFTC wants big players to trade on exchanges

* Banks should be forced to trade on exchanges

* Gensler says it’s “absolutely essential” in reform

* Gensler wants insider trading law for commodities

(Adds IEA meeting on oil prices, paragraphs 14-15)

By Christopher Doering and Tom Doggett

WASHINGTON, Jan 27 (Reuters) - Congress should require banks and other big players to trade derivatives on regulated exchanges as an “absolutely essential” part of regulatory reform to prevent another market crisis, the chief U.S. futures regulator said on Wednesday.

Exchange trading of “standardized” swaps is an important element in the Obama administration proposal to bring over-the-counter derivatives under federal control. The plan also calls for reporting trades and processing through clearinghouses to reduce risk.

“Make no mistake: This is an absolutely essential component of reform,” said Gary Gensler, chairman of the Commodity Futures Trading Commission, referring to trading of swaps on regulated exchanges and electronic platforms.

In prepared remarks, he said requiring banks and other Wall Street dealers to bring their standardized transactions to transparent trading venues would “shift the information advantage from a small group of derivative dealers on Wall Street to the broader market.”

While the House of Representatives approved its financial market overhaul bill in December, the Senate is in the early stages of assembling its own regulatory reform plan and there is no timetable for when it might move forward.

With health care and climate change, the Senate has a lot to address before acting on legislation that would put unregulated OTC derivatives under purview of the CFTC.

The White House, which has pushed for financial reform, will shed more insight on its agenda on Wednesday night when President Barack Obama gives his State of the Union address.

The $450 trillion swaps market is widely blamed for amplifying the recent economic meltdown, as many banks entered into financial arrangements that went bad.

“While the recent crisis seems to have eased and many banks are repaying TARP (Troubled Asset Relief Program) money,” Gensler said, “I believe that we still must enact regulatory reform to promote transparency and reduce risk in the evolving over-the-counter derivatives markets.”

Gensler also backed establishing a so-called “Eddie Murphy” rule, named after the actor’s role in the film “Trading Places,” where traders sought to make a profit in orange juice futures after stealing an Agriculture Department report on the U.S. orange crop. The measure would ban insider trading using nonpublic information acquired from a government source.

“It’s not against the law,” he said. “We’d like to change that.”

Separately, Gensler expressed support for a White House proposal to ban proprietary trading by big banks and to limit their investments in hedge funds.

“I think one of the critical lessons out of the crisis is that we have a group of institutions that have become increasingly concentrated and they’re so large and interconnected in our society that it’s difficult to maneuver,” he told reporters. “We can’t leave this to the taxpayers to bail them out.”

Meanwhile, the International Energy Agency plans to hold a meeting on Feb. 25 in Tokyo with representatives of OPEC, banks and regulators to discuss the factors that determine oil prices. The meeting comes as the CFTC is seeking to rein in speculation in energy trading.

Gensler said he could not attend the Tokyo meeting, but the CFTC would probably send a representative.

Reporting by Christopher Doering and Tom Doggett; Editing by Russell Blinch, Marguerita Choy and David Gregorio

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